StatsGeek (29.28)

10 Reasons We Haven’t Seen the Bottom

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Before I give my reasons, let me make clear that I have no idea what the market is going to do in the short term. Dow 8,000 would not surprise me in the least (well maybe a little). The biggest rallies happen in bear markets. Also, don’t read this if you prefer to remain in denial – you won’t like it. Caveats thus dispensed, here we go:

1) The bottom can’t be here because too many folks are still looking for it. When all hope of catching the bottom has been given up and the thought of buying a stock makes people want to puke, then maybe the bottom will be in. We’re a long way from the paradigm shift in sentiment right now.

2) There is a massive oversupply of companies built on free money. 1 out of every 3 companies needs to disappear, in my guesstimation. Good luck picking stocks now before the massive bankruptcy wave that is coming.

3) Discretionary income falls by a multiple of wealth destruction. In other words, if you lose 25% of your household income, discretionary spending can fall 80%. Think about it.

4) Behavior is changing this time. This isn’t like the tech bubble of the late 90s. That was a speculation bubble based on the greater fool theory. This time, the recession is pervasive and it is changing people’s lives for the worse by the day. The shock to the economy is just beginning.

5) Investors are going to understand more and more that the stock game is rigged. Who wants to go to a casino where the government is the house and keeps loading the dice and changing the rules? The economic stats published by the government are garbage and who knows which company’s CEO has been cooking the books?

6) Valuations are high. P/E ratios are only meaningful if you have some confidence of future E. I personally believe that earnings of the overall market are going to be negative for a couple years, which makes the P/E ratio N.M. or not meaningful. What will investors be willing to pay for negative earnings? Even if you believe the optimists who think S&P500 earnings will be around $50 this year, that puts the current P/E at 14x. Previous big bears have ended with P/Es closer to 6x or 7x.

7) Technicals. You can take your McClellan Oscillators, MACD, and Fibonacci Cycles and stick them where the sun don’t shine, as far as I’m concerned. Look at a 20-year chart of any major index and tell me that you’re jump in front of that freight train.

8) There will be other shoes to drop. In fact, it may start raining shoes. Some possibilities: currency crisis, war, treasury bond default, massive selloff by Russia, Japan and China of dollar reserves, bank runs, food shortages, civil unrest, snowballing bankruptcies, systemic financial meltdown; skyrocketing interest rates and inflation when foreign central banks stop buying those little pieces of paper that promise them 3% interest paid out of our children’s future earnings. If you really think that none of these or other shoes will drop, then you’re living in la la land. “This is America. We’re special. Blessed by God. It can’t happen here.” That’s exactly the type of arrogance that marked the end of other empires throughout history.

9) Political anger – people are getting mad, and they should be. Congress and the Fed are spending trillions of our money down a sinkhole – but at least it has been creating all those jobs and helping the little guy! Our children will be spending a huge part of their labor to pay interest on debt created by the profligacy of our generation. Good thing our congressional leaders all have PhDs in economics and finance. Not! Central planning worked so well in the USSR that we’re going to try it in our country.

10) The economy is in a death spiral. Lower spending begets layoffs which begets lower spending still which begets more layoffs. If we had been saving during the sunny times for the rainy days, this would just be a recession. But everybody is broke.

I really, really hope I’m wrong about all this. But I honestly don’t see how I could be.

I'll give you one reason why I think there's a reasonable chance we may have seen the bottom: Inflation.

Even if earnings fell or stagnated, if there *were* a massive selloff in the dollar, a treasury default, or other issues related to dollar weakening, equities will rise nominally, even without a change of valuation.

Nominal values matter. I don't think we're anywhere near a "real" bottom, but I would be completely unsurprised if the nominal bottom is already in.

Good points. I can see why Dow 5000 or lower is not far fetched. However I can't advise anyone to get out of stocks after a 50% decline in the market nor can I flee my own stock positions. Historically, dumping stocks after a 50% drop was a winning play only one time and the rest of the time it was a huge mistake.

as to 5), there is a point at which skepticism turns to cynicism and that turns to paranoia. Fraud at listed public companies has always been rare (though certainly not as rare as we would like). And while government economic stats aren't perfect, they are flawed in consistent ways.

Just taking numbers 5 and 9 (and any government part of the others), because they make up an area where we are digging our own hole with a widening array of shovels.

Up until this last week, I have held to the idea that no one person could be held responsible for enlarging the economic problem in this country. It is global, crossing so many economic sectors, and affecting so many people that for any single individual to have a personal impact, he would need to make a real effort and have immense power.

Our president is acting like a novice photographer grabbing up toys to try to quiet a screaming baby. He is, in quick succession, grabbing health care and education to go with banking, insurance, real estate, and all of the normal areas that he should already have sway over. We have a nationalized bank other than the Fed. He is trying to distract the media and the public from looking too hard at the economy by scolding one group after another. If I hear once more "We, the American people, will not tolerate...(fill in the blank)..." OR "How dare you think that you can....." I don't know whether to laugh or cry. The script stays the same. Our government shoves money at something, our president lectures the same something, then they try to take it over or sic the media on the terrible, terrible whatever that is the current something under attack.

The best outcome I can hope for is that we have an idealistic but naive president who does not realize that he is marching us straight toward a socialist totalitarian oligarchy. The worst fear that I have is that we have the brilliant and charismatic leader that so many think we have - and that he is marching us straight toward the horror that he has outlined in Obama Nation Because that is not a democracy nor is it a republic, but it is still the land that I love.

Nominal dollars vs. inflation-adjusted dollars may end up making a huge difference in the levels eventually.

Short term I think the rally will last a while. March lows are in similar to the September and November lows. We might revisit those levels later and go lower or we might not see them again. But we won't revisit them in March.

Being realistic is a good thing but thinking that everything is going to go down the sink and being so pesimistic is the main reason why we are so deep in the mud, this is a confidence crisis, led by people like you, who thinks the world is getting to an end.

If we want to avoid this crisis, it's us who need to start stimulating the economy, start buying instead of selling, and be more optimistic.

Maybe as individuals it's hard to make a difference, cbut if we all start acting to activate the economy we will make the difference between hitting bottom or skyrocketing.

Elichaver, there is doom and gloom pessimism and there is reality. The reality is that I spent several hours this weekend finding ways to trim $70 per month off my phone/utilities. I'm not broke yet, but the pay freeze is noticeable and the pay cuts possible. It was overspending and loose credit that got us partially into this mess, (mixed in with greed and just plain stupidity).

It think when we will see bottom is a little more important than where we see bottom. I think the market would rally (temporarily) if a few major companies, (GM) went bankrupt. Not every sector will fold at the same time, nor every stock in any sector, but the next few years will be challenging. I still believe there are winners out there and will place my bets accordingly, just not with the milk or mortgage money. (Nor the emergency money I'm using to buy C-rations! :) Great post, thanks!!!

70% of the people depend on Obama to save them from their own stupidity. Not that the other guy was any better. But with him we wouldn't be spending we'd be cutting, perhaps he would have also nominated people who don't have tax issues....

More likely be on an actual recovery then this psudeo one.

BTW, Richard Hatch goes to Jail for tax evasion and Geitner becomes treasury secretary; who'd he suck on to get that...

>>>......Not that the other guy was any better. But with him we wouldn't be spending we'd be cutting, perhaps he would have also nominated people who don't have tax issues....<<<</em>

You have got to be joking or completely dillusional. I don't give a mouse's donkey (or a rodent's burrow?) what your party affiliation, but suggesting the retarded cowboy would be cutting taxes is lunacy!

For the record i am a fiscal conservative. Unfortunately the only choices have been tax and spend or don't tax and still spend. How is it that right wing talk radio still has you convinced that the people who hijacked the Republican party would be cutting spending?

You guys aren't debunking a bottom you are professing Armageddon. If you really believe everything in this blog is imminent then you need to get out of the stock market, stop waisting your time on blogs, build yourself a bunker and start stockpiling MRE's.

Better yet you should get your hands on some sleeping pills and a bottle of whisky. That would help with some of the negative sentiment out there.

Or are you just short on the market and this is a guerrilla marketing ploy. That I could respect.

It is easy to be a naysayer , it is so easy to be negative about everything in the stock markets , banks etc., etc. ..but we are the greatest nation on the earth..Why? God , on our money...

"In God we trust" but we trust in money , let us not trust money, but lets trust God with our money...How? Wisdom... being fair and just with the system, the people cry out and God has heard those cry's, the judgement of the crooked financial system and the stewarts thereof is what we are in ,we can avert this if we "trust God with our money" or be reminded on our money "In God WE Trust"... 2 be continued..

Nice post. Personally though, I agree with Arthur Hugh Clough, "If hopes were dupes, fears may be liars" and the eternally true statement that "this too shall pass". I am going to hunker down and wait it out. Yes, it will take time, but we are not in irreversible decline.

US politics has been the Achilles heal of our capitalistic system. The US has more valuable assets than any country in the world, yet our freedom and democracy has allows us to choose morally bankrupt and incompetent leaders. Unless the citizens of the US replace the congress in 2010, we are likely to relive the time of Nero. His reign witnessed a fire that destroyed half of Rome in 64. A wave of uprisings in 68 led to his flight from Rome and his eventual suicide.

This brutally frank post is a wake up call for some...a horror for some...and opportunity for some. Me, I'll take whiskey,some mother earth herbs, AMZN for the rest of the current bear rally...then some more DXD, SDS and AUY, until the declining ends...and it will end.

I too begin to tire of..."we've inherited"..."we the people won't tolerate" and " how dare you think we can..."...GD it...crooks theives, liars, cheats and prix need to be put in jail...and separated from their looted millions-it is incredible that they still run the ships that they ran aground...our nationalized banks need to start lending to small business...and our core problem of mortgage foreclosure solved. We will eventually overcome our problems. Hopefully, we will stop trying to solve every other country's problems.

Your way of thinking is what destroyed the best super powers in history (Greek Empire, Roman Empire, USSR) by thinking we are all indestructable. Our money wont mean crap after our lender's realize that we wont be able to pay them back. Yes we can count on God to save us and forgive us from our greed overspending and degenrated nation!

A few folks always get their facts wrong, including some of the follow-up posters. If one thinks that history says that since we have fallen 50% that we won't fall further, well, you don't know your history. Japan is still down about 80% from 20 years ago, and the Great Depression bottomed out at about 90% (and it took a few years to get there....). If you had jumped all in to either of those markets after it had fallen 50%, you still would have lost another 60% on your remaining investments (actually more). I'm sure there were plenty of people screaming "the bottom is here!" after those markets had only fallen the first 50%.

Another point. One doesn't have to believe that we are entering the Apocalypse to believe that we will fall another 50%. The world didn't end in Japan, nor did it after the Great Depression. The world won't end after this one. Dogs and cats won't start living together. There may be big demonstrations (they've happened before, and they'll happen again), but we'll survive it and move on some day. When you label us who think the market bottom is not yet in as end-timers, you show that your black-or-white, on-or-off, up-or-down, evil-or-good view of reality does not mirror the actual reality, which is always a shade of gray.

Another point. A lot of you don't seem to understand politics very well because you get your sound bites from parties that have a monetary interest in making you believe a certain way (talk radio is a good example...). So I'll explain the actions of Congress and the president to you: It's all political calculation. The Dems know that right now is the ONLY time to reverse the 8 years of Republican pork, and swap it for Democrat pork. The idea of "stimulus" is the perfect cover. The Dems are piling it all in at once, right now, because once the economy tanks further, it will no longer be politically tenable to add more pork. The Repubs know that the best thing to do politically right now is to just keep barking "pork pork pork" like the Swedish Chef, and not offer any real alternatives. That's just smart politics. Barak has gone along with it as a last payoff to the Dems. He will clamp down on the earmarks soon, make enemies of a lot of them, and will extol his own pork-bashing virtues come time for his next election. All of you calling the current Democrat-friendly environment the "end of democracy" apparently have never understood our democracy to begin with. A lot of Democrats thought the end of democracy was happening under W, and look how that turned out. Give this a few more years to play out, and you'll see the return of Republicans. And after that... Democrats again. This is what happens because it's what the people want.

@kushme, keep drinking that Kool-aid. W spent money that we didn't have at an incredible rate, blowing away all the budget surpluses we had. Just because Obama is blowing even more doesn't mean that W didn't. W's gold-old-boy political machine was plenty corrupt as well. Obama's machine probably is too, since I'm pretty sure that most people that get into high offices in our country, and probably world-wide, don't get there without breaking eggs. Time will tell. Again, it's all a big gray mess, and always will be.

@uclayoda87: "Unless the citizens of the US replace the congress in 2010, we are likely to relive the time of Nero." Are you insane?

@abitare: I enjoy reading your posts and sometimes even agree with you. But why are you always touting your CAPS score? Your rank is 20 for a reason, that being that CAPS is just a game, with little bearing to reality, and one of the things Fool wants to emphasize is accuracy. Are you actually BRAGGING about getting a lot of points in one account, and a high ranking in the other? Points are easy to get. Accuracy over many picks is not.

It is amazing how successful you can be seeing what others cannot and having the convictions to act on those beliefs. You would have called me insane if a year ago, I had publically predicted what happened to the market in 2008. So I guess you can call me insane for two reasons, but my insanity saved me a lot of cash in 2008 and has made me real money in 2009.

LOL. OK. I've thought a crash was coming since 2006, so no, I wouldn't have thought you were insane for saying that. My belief also saved me some cash, too.

But imagine this. You, no longer protected by the anonymity of the Internet, standing on a street corner in New York, saying, "WE MUST ELECT A REPUBLICAN MAJORITY IN CONGRESS in 2010 OR THE TIMES OF NERO ARE AT HAND!!! HALF OF OUR GREATEST CITY WILL BURN, AND A WAVE OF MILITARY UPRISINGS WILL LEAD TO THE SUICIDE OF OBAMA!!!" People would walk by you, smile sadly, and look for your coffee can to put some spare change into.

I too want Republicans to retake Congress in 2010. Not because I like Republicans, but because I think our federal government is best when gridlocked. However, should the Dems somehow maintain power, I do not expect the times of Nero. Lets you and me try to revisit this thread on March 13, 2011 and see what's happened. I'm putting it on my calendar now.

By the way, I was in Los Angeles when Rodney King's beating sparked the riots that resulted in much of the city being torched, so don't feel too confident that civil unrest can't occur for events such as 25% unemployment, expecially in a society that feels entitled.

I agree that divided government works because gridlock is much better than unleashed incompetence.

The real test to our society will come when China, Japan and Saudi Arabia no longer wish to buy the US debt. That may occur before March 13, 2011.